The Annual Allowance (AA) limits the amount of pension savings in any one tax year that can attract tax privileges – it’s currently £40,000. This does affect some retiring officers and it’s a complicated business, so we asked the Forces Pension Society for a little help with the maths…
If the contribution (known as Pension Input Amount (PIA)) to the scheme member’s pension fund exceeds £40,000 then they are liable for a tax charge on the excess contribution.
The groups of service personnel most likely to breach AA are: officers at OF4 (Lieutenant Colonel) and above; officers on promotion from OF3 to OF4; late entry officers when they have completed their 5 year return of service, and where their AFPS 75 pension is calculated as an OF3; and medical officers and dental officers in receipt of professional supplements.
There is no ‘real’ pension fund in the case of Government unfunded pension schemes (such as military pensions) so a method has been devised to calculate the input that would have been required to pay the increase in the pension between one tax year and the next.
The PIA is calculated by taking the annual pension value at the start of the new tax year (6th April), multiplying it by 16 and adding any lump sum entitlements. The value is then calculated the same way at the end of the tax year (5th April). The starting value is uplifted with inflation (CPI) for the relevant year. The PIA is the difference between the two.
What if I’m over the limit?
If an individual breaches the AA limit they will receive notification of a possible tax charge by way of a letter from Veterans UK, usually between October and December.
If the AA limit is exceeded in any given year, then unused allowance from previous years can be used to offset the excess. The rules allow only the previous 3 tax years’ unused allowance to be considered. If your soldier breaches the £40,000 limit and all the previous 3 years carryover is used up and there is still a breach, then they will be liable for a tax charge.
There are 3 options for payment:
- For a balance up to £3,000 your soldier can ask HMRC to alter their tax code. This will spread the payment over a financial year.
- Your soldier can pay the whole amount to HMRC directly.
- Your soldier can apply to Veterans UK to use Scheme Pays to pay the tax charge. If they choose this option, it will result in a reduction (for life) to your soldier’s pension when it comes into payment and a reduction to the ‘75 Scheme lump sum.
If a service person is interested in Scheme Pays, then they should complete Annex D to the letter sent by Veterans UK and return it to them. Veterans UK will then provide a ‘quote’ for the reduction to the pension. However, please note that the quote is based on the pension coming into payment at age 65, whereas in reality your soldier’s ‘75 Scheme pension is likely to come into payment much earlier. This being the case, the reduction to their pension will be lower because it will be in payment for longer. In terms of the ‘15 Scheme pension, if this comes into payment at your soldier’s State Pension Age the reduction will be actuarially adjusted (increased) as the pension will be in payment for 2 or 3 years less.
Further details
To learn more about AA you can listen to a 10-minute audio clip produced by the Forces Pension Society. You may also find the MOD’s step by step guide to the Pensions Savings Taxation Notification Letter helpful. If you’re a member of the FPS and have any armed forces pension-related questions, email pensionenquiries@forpen.co.uk or visit forcespensionsociety.org